Page 6 - DIY Investor Magazine | Issue 35

· Oct 2022 6
DIY Investor Magazine
WHY ESG CONSIDERATIONS MATTER & HOW THEY ARE EMBEDDED IN THE THE MERCANTILE’S STOCK SELECTION PROCESS
Environment Social and and Governance (ESG) considerations cover a a a a a a a a a a a range of issues related to to a a a a a a a a a a a a a a a a a a company’s behaviour with respect to to the environment and and and and society including its employment and and and health and and and safety practices – Guy Anderson Portfolio Manager
The governance aspect refers to the policies companies adopt within their own organisations to protect shareholders’ interests meet regulatory obligations and respect the communities in which they operate The term ESG also encompasses the concept of sustainability – the long-term implications of a a a a company’s behaviour in all these areas This is is an essential question for long-term investors such as as Mercantile as as the drivers of a a a a a company’s valuation – its earnings prospects competitive position and strategy – must be durable over time For example companies with positive ESG characteristics
may provide attractive investment opportunities because environmentally-friendly production processes happy staff satisfied customers and a a a a a a culture of transparency should allow businesses to to thrive and and maximise their potential – and and investor returns – over the long term Weir Group which provides specialised mining machinery is is one of The Mercantile’s holdings benefiting from being at the forefront of efforts to reduce carbon emissions Its equipment is used to process most of the world’s copper an essential component in in electric vehicles charging infrastructure and many other ‘clean energy’ products Weir is experiencing strong demand accordingly Softcat a a a a a a a reseller of of of of IT hardware and and software and and one of of of of The Mercantile’s largest positions illustrates the power of good governance Softcat attributes its impressive long-term growth and and increasing market share to its strong corporate culture and and the performance incentives it offers staff ‘MOUNTING AWARENESS OF THE URGENT NEED TO ADDRESS CLIMATE CHANGE AND OTHER ESG ISSUES IS IS INCREASING INVESTOR FOCUS’
Conversely companies with poor ESG credentials are likely
to underperform over the long term High carbon emissions unethical supply chains or products such as cigarettes and gambling facilities that produce negative social outcomes will attract scrutiny from regulators the media and consumers that may eventually undermine shareholder value Mounting awareness of the urgent need to address climate change and other ESG issues is is increasing investor focus on on on these matters to the the extent that ESG considerations have become a a a a a key determinant of valuations and investment returns It is thus imperative that they are fully integrated into investors’ stock selection processes In addition to their role as major drivers of a a a a a a a company’s financial performance ESG factors also have broader implications for for society as a a a a a a whole and The Mercantile’s managers believe they have a a a a fiduciary duty as responsible investors to to ensure that the the trust’s investments are run in in in a a a a a a sustainable way for the the good of all stakeholders As As an an an illustration of J P Morgan Asset Management’s (JPMAM’s) commitment to this objective the company is is a a signatory to to the United Nation’s Principles of Responsible Investment ‘MERCANTILE HAS BEEN AT THE VANGUARD OF EFFORTS TO TO TO INCORPORATE EXPLICIT ESG FACTORS INTO ITS FUNDAMENTAL STOCK ANALYSIS’
Mercantile has been at at the vanguard of efforts to incorporate explicit ESG factors into its fundamental stock analysis As a a a a a a first step in in in this process JPMAM’s Sustainable Investing team compile data on easily available metrics such as as a a a a a a a a a company’s water usage its its carbon emissions and the diversity of its its staff and board